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Pricing accuracy, liquidity and trader behavior with closing price manipulation

Published online by Cambridge University Press:  14 March 2025

Carole Comerton-Forde  and
Tälis J. Putniņš
Carole Comerton-Forde
Affiliation:
Faculty of Economics and Business, University of Sydney, Sydney, NSW 2006, Australia
Tälis J. Putniņš*
Affiliation:
Stockholm School of Economics in Riga, Strelnieku iela 4a, Riga 1010, Latvia
*
e-mail: talis.putnins@sseriga.edu.lv
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Abstract

We study the effects of closing price manipulation in an experimental market to evaluate the social harm caused by manipulation. We find that manipulators, given incentives similar to many actual manipulation cases, decrease price accuracy and liquidity. The mere possibility of manipulation alters market participants’ behavior, leading to reduced liquidity. We find evidence that ordinary traders attempt to profitably counteract manipulation. This study provides examples of the strategies employed by manipulators, illustrates how these strategies change in the presence of detection penalties and assesses the ability of market participants to identify manipulation.

Keywords

ManipulationClosing priceHigh-closingExperimental market

JEL classification

G14: Information and Market Efficiency • Event Studies • Insider Trading C90: General
Type
Research Article
Information
Experimental Economics , Volume 14 , Issue 1 , March 2011 , pp. 110 - 131
Copyright
Copyright © Economic Science Association 2010

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